Government issues procurement policy note on cutting ties with Russia and Belarus

The Cabinet Office has issued a procurement policy note (PPN) on how contracting authorities can further cut ties with companies backed by the states of Russia and Belarus.

The PPN says however that "contracting authorities subject to Section 17 of the Local Government Act 1988 should note that they are prohibited from taking into account in their procurement decisions, non-commercial considerations, including the location of any country or territory of the business activities or interests of contractors, or from terminating contracts for non-commercial reasons (see Frequently Asked Questions for more information on Local Authorities)".

It says the Department for Levelling Up, Housing and Communities is considering an amendment through secondary legislation to address the issue.

The PPN applies to all Central Government Departments, their Executive Agencies and Non Departmental Public Bodies. These ‘In-Scope Organisations’ are expected to apply its provisions with immediate effect, while other public sector contracting authorities “should consider applying the approach set out” in the PPN.

The policy note said that in-scope organisations "should:

• Review their contract portfolio and identify any contracts where the prime contractor is a Russian or Belarusian supplier;
• Where a Russian or Belarusian prime contractor is identified, they should consider terminating that contract in accordance with the terms of the contract i.e. following a legally compliant process.
• Only proceed to terminate a contract if an alternative supplier can be sourced in line with value for money, affordability and with minimal disruption to public services".

The PPN adds that any decisions to terminate a contract should be made on a case by case basis and within existing legal restrictions, financial allocations and budgets.

“Where volume-based contracts exist, a reduction in volume to zero could achieve the same effect if termination is not feasible. This does not alleviate Accounting Officers from their usual duties to ensure that spending is regular, proper and value for money or for other contracting authorities to conduct appropriate and proportionate due diligence and to act in accordance with their contractual obligations,” it says.

The PPN also advises Central Government organisations that HM Treasury consent must first be obtained “for any transactions which set precedents, are novel, contentious or could cause repercussions elsewhere in the public sector, in line with Managing Public Money”.

As background the Cabinet Office says that in-scope organisations should take a proportionate and risk-based approach to reviewing their contract portfolio to identify Russian and Belarusian prime contractors. “The focus should be on major contracts and those which could have the most impact and influence on the Russian or Belarusian regimes.”

The PPN adds that “it is important that the terms of the contract and the implications of termination are correctly understood. When taking action to terminate, the process set out in the contract should be followed precisely to ensure the termination is valid.”

Contracting authorities will need to take their own legal advice about what is possible within the terms of the individual contracts to which they are party, it says.

The PPN suggests that the public sector’s exposure to Russian and Belarusian suppliers is primarily limited to the energy markets, “where there have been significant price fluctuations and the market is considered volatile”. It says contracting authorities must seek advice from an energy expert and/or a relevant public sector buying organisation before taking action to terminate an existing energy supply contract to ensure an alternative source of supply is available and affordable.

The PPN also sets out the approach to be taken on new procurements. It says contracting authorities could decline to consider – or otherwise exclude from participating in the procurement – bids from suppliers who are constituted or organised under the law of Russia or Belarus, or whose ‘Persons of Significant Control’ information states Russia or Belarus as the place of residency, “unless the supplier (or any member of their supply chain they rely on to deliver the contract):

• is registered in the UK or in a country the UK has a relevant international agreement with reciprocal rights of access to public procurement; and/or
• has significant business operations in the UK or in a country the UK has a relevant international agreement with reciprocal rights of access to public procurement".

If either of these criteria apply, the supplier should not be automatically excluded from a new procurement, as the non-discrimination, equal treatment and remedy provisions contained within the Public Contracts Regulations 2015 apply, the Cabinet Office says. "Where the supplier has a more complex group structure involving parent or group companies based or operating in the UK, or in a country the UK has a relevant international agreement with reciprocal rights of access to procurement, you should consider the specific circumstances and take legal advice where appropriate.”

The PPN and frequently asked questions can be viewed here.

Chancellor of the Duchy of Lancaster Steve Barclay said: “Public money should not fund Putin’s war machine. We are asking hospitals, councils and other organisations across the public sector to urgently look at all the ways they can go further to sever their commercial ties to Russia.

“The government will continue to work closely with these organisations, ensuring they are able to take the necessary steps as quickly as possible, including taking legal routes where necessary.”

Earlier this month LLG (Lawyers in Local Government) issued guidance for local authorities reviewing contracts with Russian state-linked suppliers in light of the conflict in Ukraine.

The guidance came as the Leader of Merton Council revealed that the local authority was to write to the Government to ask for urgent changes to the laws around who councils can choose to do business with, as the London borough sought to terminate a £1m gas contract with energy supplier Gazprom that is due to start on 1 April.

Suffolk County Council meanwhile said that, following a review, it would end a £10m contract its wholly owned company Vertas Energy has with Gazprom.